ONTARIO NEWS

by Ian A. Mondrow

Partner, Gowlings LLP

Rebuilding Ontario's electrical transmission system to support Ontario's "green energy" policy will be a significant undertaking. With the passage of the Ontario Green Energy and Green Economy Act, 2009 (GEGEA), and the implementation of the new feed-in-tariff generation procurement program that is a centrepiece of that legislation, there is a significant demand for new electricity transmission capacity.

            Ninety seven percent of the electricity transmission facilities in Ontario are owned by Hydro One, one of the government owned successor companies of Ontario Hydro. This effective monopoly of public sector ownership of electricity transmission assets may be about to change. Hydro One has estimated the spend on transmission projects through 2013 at $2.3 billion.[1] With an undertaking of this scale, even the giant crown owned wires company will likely need some help.

            In his direction to Hydro One to formally commence the rebuilding of Ontario's transmission system, the (then) Minister of Energy specifically instructed the utility to identify the commercially reasonable opportunities for engaging, or deferring to, qualified third parties/partners for planning, development and execution of transmission projects.[2] Even Hydro One has had to admit that it "may involve third party commercial entities as partners in transmission projects because of its [sic] massive scope". These statements recognize at least the benefits of, and perhaps the practical necessity for, commercial diversification in renewal of Ontario's electricity transmission infrastructure.

            With the recent release by the Ontario Energy Board (OEB) of its Framework for Transmission Project Development Plans (the Framework), Ontario is one step closer to new entry into the business of developing and operating electricity transmission.

            The OEB's Framework expressly recognizes the commercial and economic benefits of new entry into Ontario's electricity transmission sector. For those who believed in the merits of the competitive electricity sector model introduced by the 1995 Ontario government commissioned Macdonald Committee, enshrined in the 1998 Ontario Energy Competition Act, and still identifiable in Ontario's electricity sector structure of today, this recent statement of regulatory policy comes as a breath of fresh air. It also reminds of the role of the OEB as "economic regulator" of the province's energy sector.

            The OEB remains responsible for ensuring economic efficiency in Ontario's electricity sector. That means that within the boundaries of the government's energy policy, the Board seeks to minimize cost in a manner consistent with timely and effective government policy implementation. In the OEB's words[3]:

            Within the context of transmission investment policy, economic efficiency can be understood to mean achieving the expansion of the transmission system in a cost effective and timely manner to accommodate the connection of renewable energy sources. The Board believes that economic efficiency will be best pursued by introducing competition in transmission service to the extent possible within the current regulatory and market system.

            Of the three statements by the OEB of its intention for the Framework, two expressly focus on competition:

            encourage new entrants to transmission in Ontario bringing additional resources for project development; and

            support competition in transmission in Ontario to drive economic efficiency for the benefit of ratepayers.

            Under the Framework proponents will be invited to apply to the OEB for designation to develop and execute transmission expansions. The consequence of designation is the ability to recover development costs incurred from the time of designation through to the application for leave to construct the project. Recovery will be afforded to proponents even in the event that the project for which they are designated is not ultimately constructed because it is determined, in the future, not to be needed, and even if they have no existing assets or customer base in Ontario.

            Here is how the process is intended to work:

            The Ontario Power Authority (OPA), the government agency legislatively responsible for overall transmission planning in the province, is required to produce an Integrated Power System Plan (IPSP) once every 3 years. The OPA will also complete semi-annual Economic Connection Tests (ECTs) to manage its feed-in-tariff queue of projects. Together these plans will indicate specific transmission build requirements.

            As new transmission requirements are identified, the OEB will issue Notices and Invitations to File a Plan. These notices will identify those transmission projects that the OEB wishes to consider for planning approval.

            Any proponent holding an Ontario transmission licence, the obtaining of which is a relatively mechanical process, is entitled to submit proposals for transmission projects identified by the OEB. (If no proposal is submitted, the OEB can direct the incumbent transmitter to submit a plan.)

            The proposals submitted will be evaluated through a hearing process. Criteria that will be considered in evaluating a proposal will include cost, ability to execute, and project timing, and may also include innovative transmission development models, risk transfer from ratepayers, and technological innovation.

            At the conclusion of the hearing process the OEB will designate transmitters who will be expected to proceed to develop the designated project, bring a leave to construct application, and, subject to construction approvals, proceed to execute the project. Once designated, project proponents will permitted to recover their transmission project development costs.

            There are two other recent OEB policies that support this new, "competitive" transmission development Framework.

            On January 15, 2010 the OEB introduced its policy on The Regulatory Treatment of Infrastructure Investment in connection with the Rate-regulated Activities of Distributors and Transmitters in Ontario.[4] That policy mirrors earlier policy expounded by the U.S. Federal Energy Regulatory Commission[5] (FERC). It augments conventional cost recovery mechanisms with alternative mechanisms to facilitate green energy act related investments. That policy also explicitly recognizes the potential for new entry into Ontario's electricity transmission business. In its discussion of allowance for project specific capital structures[6], the OEB stated:

            Project-specific capital structures may be particularly effective for the development of consortium projects. This can be especially important for projects with a diverse set of sponsors, some of which have different capital structures. Such consortia may become more common under the Green Energy Act. For example, major transmission projects may involve diverse sponsors (private, public, and First Nations and Métis interests). Greater flexibility in capital structures could serve to facilitate these partnerships.

            On December 11, 2009 the OEB issued its Report of the Board on the Cost of Capital for Ontario's Regulated Utilities.[7] Through that policy the OEB has "refreshed" its return on equity (ROE) formula, resulting in an increase in the allowable ROE for rate regulated utilities, including electricity transmitters. The regulatory imperative to ensure that allowable ROE is sufficient to attract capital was one of the basic principles that informed the OEB's refreshed policy[8]:

            By establishing a cost of capital, and an ROE in particular, that is comparable to the return available from the application of invested capital to other enterprises of like risk, the regulator removes a significant barrier that impedes the flow of capital into or out of, a rate regulated entity. The net result is that the regulator is able, as accurately as possible, to determine the opportunity cost of capital for monies invested in utility works, with the ultimate objective being to facilitate efficient investment in the sector.

            Building on these earlier policies, the OEB's new Framework for Transmission Project Development Plans brings Ontario one step closer to new entry into the business of developing and operating electricity transmission.